Cencotech (CTZ.V) just put out their Q2 results and they caught my attention. I was already aware of the company, but due to my lack of understanding of the product and my inability to reach the management team to get clarity on this, I passed on the opportunity to invest. The company is "an active participant in the development and production of currency inventory management and control systems for financial institutions, large retailers, currency carriers, casino and mass transit operators, and various government agencies." In short, I understand they are a provider of currency inventory management and control systems, but it's not clear to me how big the market is and where exactly they fit in it. Based on the MD&A, their main competitive advantage seems to be the openness of their solution, which allows the software to interface with many other of the customer's products.
That being said, the results are hard to ignore and management has hinted at new market possibilities in the MD&A. Revenue for the 9 month period grew 33% from $924k to $1.251M and net income was up 256%, going from $182k to $649k despite a $80k forex loss (forex loss in the 9 month period in 2014 was $12k). For Q2, revenues were up 38% and net income was up 327%. This impressive growth coupled with the fantastic margins, 81% gross margin and 58% net income margin, will get any investor interested. Furthermore, the stock is now trading at about 8X annualized Q2 earnings which is awfully cheap if the company can keep growing, even at a lower pace. Digging deeper however, the results aren't as impressive as they look at first glance. Most of its clients are domiciled in the US (exact percentage was not provided) and they report in CAD, which means the top line was inflated due to exchange rate -- a rough estimate I did practically cut the growth rate in half, but it can be wrong. Furthermore, revenue fluctuates from quater-to-quarter because the business is characterized by a long sales cycle and low unit sales of a high priced product. The company is attempting to offset the quarterly fluctuations by turning to the SaaS model, something they're almost done doing. As for new market opportunities, management indicated in the MD&A that: "The features of the CC - 32 ™ coupled with the apparent new direction of the Federal Reserve Bank in the United States to off - load some of its currency processing functions to the commercial banks , and the integration of some of the larger U.S. banks, may be expected to lead to increased customer interest in this product". Management is very conservative in this company, so it's hard to guess if they're saying there will be guaranteed interest or if there may be -- hard to read between the lines, but my gut feeling based on looking at past quarters in 2013 and 2014 would lead me to conclude that it's the latter case.
In conclusion, even if the company only continues growing at a rate of say 16%, the stock is still trading at run-rate PE of 8. It should be at least trading at 2X the current price given the astonishingly high margin and recurring revenue nature of the business. I will try again to reach management, but if they don't answer, I personally cannot bring myself to invest without further understanding the company's competitive position and product.